External reserves fall by $2bn in three weeks

25 December 2014, Lagos – Falling crude oil prices have made the nation’s external reserves to continue its free fall. According to a new data on the Central Bank of Nigeria’s website, the external reserves have dropped by $2bn in three weeks: it dropped from $36.8bn on November 28 to $34.8bn on December 23

The CBN statistics also showed that the foreign reserves had lost $1bn in 13 days, dropping from $35.8bn on December 10 to $34.8bn on December 23.

CBN headquarters.

According to analysts, the external reserves have also been affected by the recent devaluation of the naira by the CBN. The devaluation has led to huge demand for the greenback, a situation that has forced the CBN to spend much of the reserves in defending the naira.

The central bank had wowed to continue to defend the naira which has fallen by 12.1 per cent against the dollar this year.

As a result, It has been spending huge amount of dollars from the reserves to support the falling naira.

The reserves had fallen to $35.8bn on December 9, down 19.5 per cent from $44.5bn recorded same date last year.

The failure of the November 25 devaluation of the naira to curb the naira slide had made the central banks to introduce some additional measures aimed at supporting the local currency.

Last week, the CBN introduced some administrative measures aimed at stopping speculation on the naira by commercial banks. It stopped banks from holding any amount of their funds in dollars. It also mandated lenders and the public to utilise within 48 hours dollars it purchased from the central bank.

The Governor, CBN, Mr. Godwin Emefiele, had admitted that it had spent huge amount of the reserves to defend the naira without much success.

He noted that development informed the subsequent devaluation of the naira.

Emefiele explained, “The CBN has spent a substantial amount of its reserves in shoring up the naira and in contrast, inflow of forex into the banks or the country has been less than anticipated in view of dwindling oil prices.

“We must remember that in an import-dependent country like ours, the exchange rate operates like every other price in the market. The forces of demand and supply basically determine movement of the naira. When oil price falls, price moves up, when supply fall, price also rises as well.

“In recent time, Nigeria has faced a simultaneous dwindling supply of dollars and rise in demand. Both forces have led to a rise in the price of the US dollars at both the interbank and BDC segments of the market. Also, the underlying factors that led to the dwindling supply of US dollars are mainly global and not country specific.

“As we all know, the main source of our forex supply is the sale of crude oil, however, during the year, we have seen oil prices fall by nearly 40 per cent from a peak of $116 per barrel in January 2014, to as low as $70 per barrel. The direct implication of this is a significant reduction in supply of dollar to the market.”

As a result, he said the CBN took the decision that it would be “sub-optimal to continue to heavily deplete the country’s reserves in defending the naira.

“This decision was appropriate because neither the central bank nor the federal government is in control of the major factors causing the depreciation of the nation’s currency.”

Arguing further, he said, “In fact the Russian central bank has abandoned its defense of the currency and allowed the depreciation of the currency, but only after it was said to have spent over $90bn in defending the currency over a couple of months.”